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Money Market Fund Reform

August 6, 2014

Mike Minter

On July 23, 2014 the Securities and Exchange Commission (SEC) finalized new regulations that change the way some money market funds (MMF) operate. Money Market Funds are simply the cash reserves portion of an investor’s brokerage account. They provide liquidity – many investors will write checks from the MMF or park cash there for ongoing living expenses.

We will be consulting with Schwab over the next few months to determine the potential impact this ruling might have on our clients. The SEC is giving MMF providers two years to make the necessary adjustments in accordance with the reform.

So, here are the changes to the regulations that govern Money Market Funds:

> The new rules require a floating net asset value (NAV) for institutional Prime and institutional Municipal money market funds (“Prime MMFs” and “Municipal MMFs,” respectively), which will cause the daily share prices of these funds to fluctuate along with changes in the market-based value of the funds’ investments.

> At this time, the SEC is defining “retail” MMF as “a money market fund that has policies and procedures reasonably designed to limit all beneficial owners of the money market fund to natural persons.”

> MMFs will have the discretion to impose liquidity fees or to suspend redemptions temporarily, also known as “gates” during periods of stress to prevent a run on the fund. The final rules also include enhanced diversification, disclosure and stress testing requirements, as well as updated reporting by money market funds and private funds that operate like money market funds.

Ok, I know when you hear something like, “fluctuating share prices” with respect to your cash reserves it can be a little unnerving. So let’s dissect these rules a little further. First, the SEC is drawing a line between institutional and retail MMFs. Institutional MMFs will be affected by this ruling, but not retail MMFs. The SEC is defining “retail” as a “money market fund that has policies and procedures reasonably designed to limit all beneficial owners of the money market fund to natural persons.”

We are being told by Schwab that our clients will most likely fall under the “retail” classification because of the “natural persons” wording.

Second, all Government/Treasury MMFs (institutional and retail) will maintain a constant share price of $1.00 and will not be affected by this ruling. Many of our clients have the Schwab Government Money Fund, and therefore will not be impacted at all.

If it is determined that any of our clients might be impacted by this ruling, we will take steps to ensure that doesn’t happen. We, along with all MMF providers have two years to determine the ultimate impact to our clients.

Rest assured that we are on top of this, and will keep you informed of any significant updates.

Mike develops investment portfolio allocations, handles trading and rebalancing, and conducts research and analysis as a Portfolio Manager and Financial Advisor for the firm. As a perpetual student of investing and the markets, Mike considers himself obsessed with the subject. Mike has earned the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Certified Fund Specialist® designations. He is also an active member of the Houston chapter of the Financial Planning Association (FPA).

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About Mike Minter

Mike develops investment portfolio allocations, handles trading and rebalancing, and conducts research and analysis as a Portfolio Manager and Financial Advisor for the firm. As a perpetual student of investing and the markets, Mike considers himself obsessed with the subject. Mike has earned the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Certified Fund Specialist® designations. He is also an active member of the Houston chapter of the Financial Planning Association (FPA). Read Mike's Profile Here • Read More Articles by Mike